Some Thoughts on my Vacation

by JDH on March 21, 2009

I have spent this week on vacation just outside Charleston, South Carolina, so if I may, I would like to start with an observation on the U.S. economy: it’s in bad shape.

After a walk through Charleston, we stopped at a Ben & Jerry’s ice cream parlour. We have them in Canada, but I don’t frequent them, so I have no first hand experience with them. However, as I stood in line with my family waiting to order, I read the Our Mission sign on the wall. I always assumed that the mission of a company was to make a profit. That’s it. Make a profit. Not so with Ben & Jerry’s.

They do have an Economic Mission which is to have profitable growth, but the first mission listed on their web site is their Product Mission, which is to use natural ingredients that “respect the Earth and the environment”. They also have a Social Mission, “to operate the company in a way that actively recognizes the central role that business plays in society by initiating innovative ways to improve the quality of life locally, nationally & internationally.”

So, how are they doing? Not well, based on my experience in Charleston. On a Sunday afternoon, in the middle of the tourist district, they had a grand total of one employee on duty. She was clearly in a very bad mood. The wait in line for one tiny scoop of ice cream was about 15 minutes. It would have been longer, but the vast majority of customers in line left before they could order, due to the long wait. (I was one of the ones who left).

If an a time of rising unemployment the socially responsible people running Ben & Jerry’s don’t know enough to have more than one person on duty, the company is in big trouble.

About three doors down the street was a candy shop, and outside the shop was a young man passing out free samples to everyone who walked by; many of the passers buy where potential customers that left Ben & Jerry’s, quite unsatisfied. The free samples lured customers into the shop, and in the small shop there were at least half a dozen employees serving the throng of customers. I didn’t do the math, but I assume the small shop did ten times the business as Ben & Jerry’s did on Sunday afternoon. That means the small, well run shop created more jobs, and therefore was more “socially responsible.” After this experience, I will no longer shop at Ben & Jerry’s (not that I did before, so neither Ben nor Jerry will be losing any sleep over this).

As an aside, how socially responsible is it to run a company that makes a product that contributes to the obesity problem in the United States? Hey, Ben and Jerry, put a fruit cocktail or something on your menu. And yes, there is clearly an obesity epidemic in America. It is obvious that obesity is at epidemic levels in America, even more so than in Canada. I shudder to think what that will cost the U.S. health care system in the future.

On our drive down we had to stop a few times for gas. Apparently at many self serve gas stations you can insert your credit card into the pump to pay; at some stations you are also required to type in your Zip Code. Being Canadian, we don’t have Zip Codes; we have Postal Codes (same concept, but ours contain numbers and letters). The keypads on the pumps have no place to enter letters, so I couldn’t use my credit cards at those pumps. I guess they don’t get many Canadian tourists in these parts. Apparently at Shell and Sam’s Club gas stations postal codes are not required, so guess where I did all of my gas shopping?

A final observation: there are a lot of “For Sale” signs on houses here. We counted the For Sale signs on one stretch of upscale vacation properties in South Carolina, and at least one third of the properties are for sale. That’s a huge number, and does not bode well for the real estate market.

Enough of my observations of life in America. My point is that, based on my unscientific observations, the American economy appears to be in deep trouble. Now, let’s talk about the market.

Last week in my post on Dines, Casey and the Blogosphere I stated that “the game plan from here is to expect further market weakness, so I will remain in cash, and gold and silver stocks, with a few short positions like the RSW to round things out. In the medium term I assume we will be testing much lower market levels, and I assume gold is going much higher, so I will continue to add to my positions on weakness.”

Well, I guess I was half right.

The Dow closed last Friday, March 13, at 7,221, considerably higher than the 6,547 low on March 9. Tuesday and Wednesdays were big up days, with a pullback on Thursday and Friday, where the Dow closed at 7,278, approximately where it started the week. I continue to believe there is more “down” to come, so I am averaging down on my shorts (specifically RSW – Rydex Inverse 2X S&P ETF) on up days.

Gold, it would appear, did much better, thanks to our friends in government, who announced on Thursday they would be spending $1 trillion dollars to buy up securities. The market, quite correctly, interpreted this as the creation of $1 trillion dollars out of thin air, and the rush to safety was on, with gold up big on Wednesday, and gold stocks posting impressive gains on Wednesday, Thursday and to a lesser extent on Friday. Gold traded as low as $885 on Wednesday, and was as high as $961 on Thursday; that’s a big bounce.

I have no idea what gold will do in the short term, but I have no doubt that in April, or May, or June, we will look back on $1,000 gold as a great deal.

And, finally, what’s up with this AIG mess?

The government (meaning you, the American taxpayer) gave AIG $175 billion. AIG then passed that money on to some of it’s counter parties, like $11 billion to a French bank, $8.1 billion to Goldman Sachs, and so on. (You can see the list in the New York Times). Why are the Feds propping up French banks? I have no idea, but it’s not my money, so they can do with it what they want.

What I don’t understand is why are we now upset that American employees of AIG got $165 million in bonus money? The whole point of stimulus spending is to put money in the hands of consumers, who will then spend money and create jobs. That’s exactly what the government, through AIG, has done.

According to NPR, which is not exactly a bastion of conservatism, President Obama and the gang have known for months (or at least for weeks) that the bonuses would be paid. So why should President Obama get all choked up about it now? Sounds like a P.R. gambit to me. Which I guess is why lawmakers want to tax the bonuses out of existence. Give them money, then tax it back. Makes sense to me, in this upside down world we live in.

This is why we don’t want the government running the economy.

This is why we own gold (because government can’t print it).

Please don’t interpret my comments as a condemnation of President Obama. George Bush 2 was no genius. I am neither a Republican or a Democrat (I’m a Canadian, and I’m a pragmatist, of which, alas, there is no political party). I only comment on these matters to illustrate that, no matter who is running the show, things are really, really screwed up. I will continue to short the market, and I will continue to own gold.

And, for the record, I predict that Treasury Secretary Timothy Geitner will be gone by summer. Someone will have to pay for these screw ups; he will be the fall guy. The market rallied 500 points when his nomination was announced. I predict it will rally 500 points when he announces he is stepping down for “personal reasons”.

So buy gold.

That’s it for this week. Sorry for my political rants; I promise to be good next week and confine my comments to the markets, although, as I stated above, my thoughts are indicative of why I think the market is headed for further turbulence. As I sign off I am packing my family into the car for our 14 hour drive back to Ontario; the weather looks good (there was snow in Kentucky as we drove down here, which I thought was strange), so I expect my return trip will be uneventful.